Tumblr-ing Dice
Christopher Carter
"Tumblr has scant revenue and a nascent business model...and it raised $85M in venture capital". This is how the Wall Street Journal opened its article on Tumblr's latest capital infusion that valued the company at $800M. I want to point out from the beginning I am not a Tumblr hater. They are growing rapidly in terms of users, unique visitors and page views. They have a slick, user friendly, interface and presentation that makes reading blogs clean and fresh. And user's posts can be as simple as a photo. They still pale in comparison to the top blogging services based on unique visitors - Blogspot at 340M and Wordpress at 130M according to Doubleclick's Ad Planner.
Tumblr just has "scant" revenue, no business model and an $800M valuation. In December of 2010 the company raised $30M at a valuation of $120M. Thus, in 8-9 months, with "scant" revenue, Tumblr's valuation increased almost 6X. How does this happen?
Most valuations begin with multiples of revenue, EBITDA, or Net Income based on the values of comparable companies. With "scant" revenue these methodologies are useless.
One can only surmise the Venture Capitalists who invested in Tumblr looked at other metrics to infer a valuation. My guess is they looked at things like number of users, unique visitors, total page views and growth in some or all of the above. Since several of the participants in the latest funding round were also investors in LinkedIn let's look at LinkedIn for comparables.
Using information from Doubleclick's Ad Planner data from July 2011, LinkedIn had 80M unique visitors and 2.5B page views. At the same time Tumblr is listed as having 34M unique visitors and only 1.7B page views (NOTE: the WSJ article quotes the Tumblr CEO has claiming the page views are closer to 13B; also, LinkedIn now claims more than 100M users - full disclosure). Based on the Doubleclick data LinkedIn has more than 2X the unique visitors and 800K more page views. LinkedIn went public at a market capitalization of about $9.0B and as of 10/2/11 was trading at a Market Cap of just over $7.2B. This would infer a reasonable "valuation" for Tumblr, using this data, of about $3.6B. Let's not forget LinkedIn had revenues in their last fiscal quarter ending June 2011 of about $121M. Their trailing 12 month revenue was about $324M, making their market cap about 22X trailing 12 month revenue. Seem high? What does this say about Tumblr?
If you want to look at other comparable valuations based on revenue, The Business Insider 2011 Digital 100 World's Most Valuable Startups, as of July 2011, lists Tumblr at #22 at the WSJ reported $800M valuation with, remember, "scant" revenue. Coupons.com is listed at #21 at a $1.0B valuation. Its revenues are reported at $100M, thus a 10X multiple to revenue. eHarmony is listed at #23 at an $800M valuation. Its revenues are listed at $300M or about a 2.7 multiple to revenues. The multiples reflect the business model of each company based on how it derives revenue vis-a-vis its competitors. Again, with hardly any revenue Tumblr is valued at a comparable level to companies who are generating at least $100M. Fair?
One could say a paradigm shift is upon the investing community, one that attaches value to the aggregation of a community of online users to whom a business model can eventually be developed. This could be driven by the fear of missing out on an investment in the next Google or Facebook. The Venture Capital investment pools are raised to create a return on the investment for the limited partners. Failure to deliver a return impacts the next funding round. Perhaps there is a premium attached to the valuation by the venture capitalist that accounts for the higher level of risk they bear for investing in a business without revenues but with "potential" to create significant revenues. I imagine there is also cache in having your firm affiliated with an investment in the next Google or Facebook.
The business model for these community aggregation sites becomes a debate amongst the investors as to which model will generate enough revenue and profitablility to validate the valuation to be pitched at the time an investee is IPO'd or purchased, one that will provide this return on invested capital for the VC firm. Thankfully for the VCs they have compatriates who also buy into the valuation premises they are espousing, creating an exit for the VCs via IPO or acquisition at an even more elevated valuation. To quote a former Econ professor of mine, "what a tangled web we weave".
A school of thought back in the old days, you remember, 5 or 6 years ago, mandated companies had to actually have revenues and generate profits by properly managing their businesses for a valuation to be determined. I understand the times are a changin' but this still feels to me like a game of chance. I have no doubt Tumblr, and others who are in the community aggregation business, will develop ways to generate revenue, probably advertising based or some level of premium service for users who desire advanced services a la LinkedIn. But will these models truly validate the accelerated valuation placed on the company by its Venture Capital investors? LinkedIn IPO'd at a valuation of about $9.0B and then was promptly downgraded by analysts at the same entities that argued for the $9.0B valuation.
It all seems like a roll of the dice to me, and in this case the Tumblr-in Dice.